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Legal and regulatory framework
Types of transaction
What types of transactions are classified as ‘corporate reorganisations’ in your jurisdiction?
The main types of transactions that are classified under Turkish law as ‘corporate reorganisations’ are mergers (either by forming a company or by takeover), demergers and changes of corporate type. In addition to the foregoing, intra-group transfers of shares and liquidation of dormant entities can also be categorised as corporate reorganisations.
Rate of reorganisations
Has the number of corporate reorganisations in your jurisdiction increased or decreased this year compared with previous years? If so, why?
We have seen an increase in the number of corporate reorganisations in Turkey this year. This increase was caused by a number of events, including, but not limited to, the following: liquidity problems faced by some group companies, holding companies’ desires to benefit from tax losses carried forward, international investors moving out of certain sectors, disputes with local shareholders, local management issues and local aspects of global mergers or acquisitions.
Are there any jurisdiction-specific drivers for undertaking a corporate reorganisation?
How are corporate reorganisations typically structured in your jurisdiction?
Although we see a significant number of corporate reorganisations by way of demergers and changes of corporate type, especially from a limited liability company to a joint stock company, most corporate reorganisations are typically structured through mergers (whether in part or in whole).
Laws and regulations
What are the key laws and regulations to consider when undertaking a corporate reorganisation?
The Turkish Commercial Code No. 6102, published in the Official Gazette, dated 14 February 2011 (TCC), is the main body of law for corporate reorganisation. That said, depending on the area of practice of the company in question, certain other laws and regulations may need to be considered when undertaking a corporate reorganisation.
For example, companies operating in the electricity sector are subject to the Electricity Market Law No. 6446 and the relevant regulations, including the Electricity Market Licensing Regulation, published in the Official Gazette No. 28809 and dated 2 November 2013. Similarly, banks operating in Turkey are subject to the Banking Law No. 5411 as well as the relevant regulations, such as the Regulation on the Merger, Acquisition, Division and Changes in Shares of Banks, published in the Official Gazette, dated 1 November 2006, and Regulation No. 26333 (the Banking Regulation). For companies operating in the insurance sector, the Insurance Law No. 5684 will need to be taken into consideration before undertaking a corporate reorganisation.
If a publicly traded company wishes to undertake a corporate reorganisation, the relevant provisions of the Capital Markets Law No. 6362 and its related regulations will apply.
What are the key national authorities to be conscious of when undertaking a corporate reorganisation?
Corporate reorganisations are deemed effective upon registration before the relevant trade registry established by the Ministry of Customs and Trade, and each company (whether public or private) is required to register before the relevant office of the trade registry in the place of its incorporation. As such, the requirements and directions given by the Ministry of Customs and Trade and the relevant trade registry office play an integral part in the successful consummation of a corporate reorganisation.
As discussed above, companies operating in the energy, banking and insurance sectors are also subject to other sets of laws and regulations that amend or supplement the TCC with regard to corporate reorganisation. One of the requirements introduced by these laws and regulations in contrast to the TCC is that companies operating in the energy, banking and insurance sectors must obtain the prior approval of the Energy Markets Regulatory Authority (EMRA), the Banking Regulation and Supervision Authority or the Minister that oversees the Undersecretariat of Treasury, respectively. Similarly, publicly traded companies are also subject to the supervision and approval of the Capital Markets Board. As such, depending on the sector in which the company operates or whether the company is considered a publicly traded company under Turkish law, these governmental authorities’ directives, regulations and publications will also need to be taken into consideration when undertaking a corporate reorganisation.
Further, in certain corporate reorganisations, the Turkish Competition Authority is also one of the key national authorities to be conscious of. However, intra-group transactions, which do not result in a permanent change of control, do not give rise to a notification obligation. As per Communiqué No. 2010/4 concerning Mergers and Acquisitions Calling for the Authorisation of the Competition Board No. 2010/4 (the Competition Communiqué) and the Act on the Protection of Competition No. 4054, certain mergers and acquisitions that do give rise to a permanent control change and exceed the turnover thresholds defined under the Competition Communiqué will require notification to, and approval from, the Turkish Competition Authority in order to be valid. The turnover evaluation varies based on the nature of the control change (ie, whether or not the transaction results in transfer of sole control, formation of joint control, etc).
What measures should be taken to best prepare for a corporate reorganisation?
In preparation for a corporate reorganisation, and usually simultaneously with the evaluation and approval of the company’s shareholders of the proposed reorganisation (especially in the case of a reorganisation by way of a merger, takeover or acquisition), the best practice measures are:
- conducting legal, tax, technical and financial due diligence to review the effects of the proposed reorganisation’s impact on licences and permits, contracts and liabilities (including towards employees);
- valuation of the target company; and
- negotiations and drafting of the associated contracts and applications.
What are the main issues relating to employees and employment contracts to consider in a corporate reorganisation?
A corporate reorganisation by way of a merger or demerger will, in most cases, be considered as a workplace transfer as per article 6 of the Turkish Labour Law No. 4857 (the Labour Law).
In the case of a workplace transfer, employment agreements of the employees working for the transferring company or employer are transferred by operation of law, together with all rights and obligations, to the transferee employer, unless the employees object to the transfer. If the employees object to the transfer, then the employment agreement of the objecting employee or employees will be deemed to be terminated by the employee or employees concerned.
The workplace transfer alone does not give the right (neither to the transferring company or employer nor the transferee employer) to terminate the employment agreements existing in the workplace at the time of transfer. The exception to this principle is the termination of the employment agreements due to requirements arising from economical, technological or organisational changes that do not solely arise from the workplace transfer.
Usually, when a corporate reorganisation is performed through a takeover or merger, the acquiring company may require the target company to terminate the employment agreements before consummation of such corporate reorganisation and re-employ the employees after the reorganisation has taken place. In this case, legal entitlements due to termination of employment would be paid to the employees by the target company at the time of termination (ie, severance pay, notice pay and accrued, but not used, annual leave days’ pay, overtime (if any) and any other outstanding employment related pay) and new employment agreements would be executed with the new company or employer.
Although such termination prior to the corporate reorganisation and re-employment thereafter may be preferable as, in theory, it would reset the employees’ seniority levels at the workplace, the Court of Appeal precedents show that the new company or employer would not be immune to liability for severance payment. More specifically, if, at a later date after the corporate reorganisation, the employment agreements of the relevant employees are terminated in a manner that would allow the relevant employees to become entitled to severance pay and the terminated employees initiate an action for collection of the severance pay, the severance amount paid at the time of termination may be considered as advance payment over the actual severance entitlements, which will be calculated by including the time of employment preceding the corporate reorganisation.
The court may therefore decide on the recalculation of the severance pay by taking into consideration the last salary and total period of service of the employees starting from their first working date at the transferor employer and order the payment of the difference to the employee after setting off the previous payment made at the time of the transfer for the settlement of the severance payment accrued as of that time.
Further, if the corporate reorganisation would result in a collective dismissal of employees as defined under the Turkish Labour Law, certain notifications to the relevant provincial directorate of the Labour Institution will need to be made before the termination of employments. The employer will also be required to fulfil other additional obligations required under the Turkish Labour Law, such as notifying the relevant workplace union representatives and holding meetings with them.
Last but not least, Turkish Labour Law sets forth an ‘equal treatment’ principle, which requires that employees with the same status and function be treated equally. Most reorganisations result in two or more sets of employees becoming the employees of a single employer. While the work done by these employees may be the same, differences in titles and pay may require an additional internal reorganisation - and typically additional costs - in order to comply with the equal treatment principle, and align the compensation of employees with the same status and function.
What are the main issues relating to pensions and other benefits to consider in a corporate reorganisation?
As per article 178 of the TCC, the transferring company or employer will remain jointly and severally liable with the new company or employer for all rights and obligations arising from the transferred employment agreements that have accrued during the term of employment prior to the workplace transfer. However, on the liability for severance pay, the liability of the transferring company or employer will be limited to the period of employment and level of salary paid to the employee at the time of transfer.
Fringe benefits (eg, lunch or car allowances, private insurance) offered to employees are also considered as part of an employee’s salary. As a result, additional efforts are typically needed to align the fringe benefits offered to the employees of the new company or employer. Given that any adverse change to the employees’ interests is considered an essential change to the employment agreement and therefore subject to employee consent, these efforts typically take the form of providing additional fringe benefits to those employees who did not enjoy such benefits with their previous employer.
With regard to pensions, according to the recent amendment made to the Turkish Individual Pension Savings and Investment System Law No. 4632, Turkish employees and foreign employees holding a ‘blue card’ under the age of 45 will be automatically included in a pension scheme by way of pension agreement to be issued by their employees. This obligation to set up a new pension scheme must be satisfied on different dates depending on the nature of the employer (private or public entity) and the number of employees working at the workplace.
Is financial assistance prohibited or restricted in your jurisdiction?
Yes, as per article 380 of the TCC, any financial assistance provided by a company to a third party in the form of an advance, loan or security, for such third party to acquire its shares, is deemed null and void. This restriction on financial assistance will not apply to transactions performed by banks or financial institutions in their ordinary course of business and transactions whereby an advance payment, loan or security is provided to the company’s or its subsidiaries’ employees for the purpose of such employees’ acquisition of the company’s shares. That said, if these exempted transactions would reduce the reserves of a company below levels specified in the relevant laws and the company’s articles of association, or prohibit the company from putting aside the necessary statutory reserves, such transactions will also be deemed null and void.
What are the most commonly overlooked issues or frequently asked questions in a corporate reorganisation?
These issues need to be considered on the nature of the specific transaction being undertaken.
In addition, negative equity or technical insolvency and change-of-control provisions, which typically cover corporate reorganisations, are also key issues in the Turkish market that require consideration.
Pursuant to article 376 of the TCC and under the respective articles 179, 179/a and 179/b of the Turkish Execution and Bankruptcy Code No. 2004, if the share capital of a company is below certain thresholds due to accumulated losses of the past exercises, the company is deemed to be technically insolvent or bankrupt. In the event of a merger, the other party to the merger must have sufficient assets to cover for the negative equity problem; failing this, the merger cannot be consummated. Negative equity also triggers a number of grounds for liability for directors, which typically need to be addressed prior to the consummation of the reorganisation.
Depending on the severity of the technical insolvency and the amount of assets that have been lost, the shareholders of a company would need to take certain actions. For instance, if half the total of the share capital and the legal reserves of a company are lost, the board of directors must immediately notify its shareholders, convene the general assembly to explain the financial situation of the company and present possible remedies. Such remedies may vary from capital increase to the sale of assets.
However, if two-thirds of the share capital and the legal reserves of a company are lost, the general assembly shall either resolve to decrease the share capital (provided that the minimum capital requirements under any applicable legislation are satisfied) or increase the capital to cure the breach. Otherwise, the company will be automatically terminated.
If there are indications that show that the company is insolvent, the board shall immediately prepare an interim balance sheet based on the continuity of the enterprise and the probable sale prices of the actives. If, according to this interim balance sheet, assets are not sufficient to pay the receivables of the creditors, the board of directors shall notify the relevant court and request for the insolvency or bankruptcy of the company.
Accounting and tax
Accounting and valuation
How will the corporate reorganisation be treated from an accounting perspective? How are target assets and businesses valued?
The accounting firms and financial advisers will be involved with regard to how assets are going to be valued.
What tax issues need to be considered? What are the tax implications of carrying out a corporate reorganisation?
Tax advice should be sought for each transaction. Stamp duty will be payable on all documents that do not fall under the exemption rules.
Consent and approvals
External consent and approvals
What external consents and approvals will be required for the corporate reorganisation?
In commercial and financing agreements, especially when the corporate structure or shareholder identity plays a significant role in the commercial relationship, it is common to see change-of-control clauses. In such cases, and if the company wishes to continue the commercial relationship after the corporate reorganisation, written approval of the other party (typically a lender, client or supplier) will be obtained pursuant to the terms of the relevant agreement prior to such corporate reorganisation, which results in a change of control. Some change-of-control provisions do not exclude reorganisations without a change of control and, therefore, consent must be sought regardless.
As mentioned above, depending on the sector in which the company operates, certain laws and regulations will govern the planned corporate reorganisation. In line with these laws and regulations, companies wishing to reorganise their corporate structure may also need to obtain the prior approval of the relevant governmental authorities implementing those sets of laws and regulations.
For example, companies holding preliminary licences to operate in the Turkish electricity market (ie, engage in electricity generation or sale operations) would risk losing their preliminary licences if they underwent a corporate reorganisation. More specifically, as per article 6(3) of the Electricity Market Law, the preliminary licence is subject to cancellation in the event the shareholding structure of the preliminary licence holder changes by way of a merger or a demerger. Further, as per the Electricity Market Licensing Regulation, a company holding a licence is required to obtain the approval of EMRA prior to a merger or demerger. In other words, preliminary licence holders are prohibited from undertaking a corporate reorganisation, whereas the licence-holding companies may undertake a corporate reorganisation upon obtaining EMRA’s prior approval.
Similarly, as per article 19 of the Banking Law and article 6 of the Banking Regulation, banks planning to reorganise their corporate structure by way of a merger, demerger or transfer of shares, are required to first obtain the approval of the Banking Regulation and Supervision Authority.
Further, if the corporate reorganisation gives rise to a permanent change of control and exceeds the turnover threshold defined under the Competition Communiqué, the Turkish Competition Authority’s approval will be required for such reorganisation to be valid.
Internal consent and approvals
What internal corporate consents and approvals will be required for the corporate reorganisation?
For a company wishing to undertake a corporate reorganisation by way of a merger or demerger pursuant to the relevant provisions of the TCC, the shareholders’ general assembly’s approval of the relevant corporate reorganisation agreement (eg, merger agreement or the demerger agreement or plan) and the report prepared and executed by the company’s board of directors will be required.
Similarly, a company wishing to change its corporate type will need its general assembly’s approval on the change of type plan and report prepared by its board of directors.
If the reorganisation is structured as a transfer of shares in a limited liability company, an affirmative shareholders’ majority vote will also be necessary.
How are shared assets and services used by the target company or business typically treated?
It depends on the commercial agreement or the services and negotiations as to how to split-out or consolidate such services.
Are there any restrictions on transferring assets to related companies?
Generally, there are no restrictions on transferring assets to related companies. In fact, in certain circumstances, the TCC facilitates the merger of share capital companies. Referred to as a facilitated merger, this merger procedure does not require a merger agreement and the registration thereof before the trade registry.
As per article 155 of the TCC, a facilitated merger between share capital companies is possible when:
- the acquiring company owns all of the voting rights and shares of the target company; or
- the acquiring company owns at least 90 per cent of the voting rights and shares of the target company, provided that:
- the monetary equivalent of the real value of the minority shareholders’ shares is offered to the minority shareholders; and
- no additional payment obligation, personal performance obligations or other personal responsibilities arise from such merger.
Can assets be transferred for less than their market value?
Yes, it is possible to transfer assets for less than their market value, subject to general contracts principles under Turkish law. However, transfer-pricing rules would apply to asset transfers to related parties for less than market value. In this context, if such asset transfer to a related party is not done at arm’s length, there may be adverse tax consequences.
Date of reorganisation
Can a corporate reorganisation be backdated or deemed to have already taken place, for example from the start of the financial year?
Because corporate reorganisations are deemed effective upon registration before the trade registry, it is not possible to backdate a corporate reorganisation.
What documentation is required in a corporate reorganisation?
The following documentation is required under the TCC for companies that are wishing to undertake a corporate reorganisation:
- in the case of a merger or demerger:
- a merger or demerger agreement (prepared by the board of directors and approved by the general assembly);
- a merger or demerger report (prepared by the board of directors and approved by the general assembly); and
- an auditor’s report (if the company is subject to independent auditing);
- in the case of a change of corporate type:
- a plan for the change of corporate type, which must also include, among others, the new articles of association of the company (prepared by the board of directors and approved by the general assembly);
- a report on the change of corporate type (prepared by the board of directors and approved by the general assembly);
- an auditor’s report (if the company is subject to independent auditing).
Further, in addition to the above, if the company operates in a regulated sector such as energy, banking or insurance, or if the company is publicly traded, the company will also need to obtain the relevant governmental authority’s approval and submit such approval to the trade registry along with the aforementioned documentation, even if the reorganisation is intra-group or the regulator reviews the direct shareholder entity.
Representations, warranties and indemnities
Should representations, warranties or indemnities be given by the parties in a corporate reorganisation?
In the case of a corporate reorganisation by way of a merger or a demerger, depending on the due diligence findings, it is common practice for the entities involved in such transaction to request certain representations and warranties, as well as indemnities. Representations and warranties are less common when the reorganisation is structured as a transfer of shares among group companies.
Assets versus going concern
Does it make any difference whether assets or a business as a going concern are transferred?
The transfer of businesses is regulated under the TCC, whereas transfers of assets are subject to the relevant provisions of the Turkish Code of Obligations No. 6098 (TCO). Transfers of assets are typically treated as simple contractual transactions under the TCO and, therefore, are not subject to any notification or registration requirements. However, if such transfer would be considered as a significant sale of assets of a company, the relevant provisions of the TCC regulating the transfers of businesses will apply. In other words, if the sale of assets affects the integrity and continuation of the selling company, then such sale will be deemed as a transfer of business rather than a transfer of assets and will be subject to the approval, registration and documentation requirements of the TCC discussed herein. Further, as per article 408 of the TCC, the general assembly’s approval will be required if a significant part of a joint stock company’s assets are to be sold.
Types of entity
Explain any differences between public, private, government or non-profit entities to consider when undertaking a corporate reorganisation.
As per article 16 of the TCC, commercial companies, foundations that operate businesses to attain their goals, associations and institutions and organisations founded by the government, special provincial administrations, municipalities and boroughs and other public entities to be governed by private law terms in accordance with their own laws of establishment, are considered as merchants and will be subject to the relevant provisions of the TCC for corporate reorganisation.
Except when explicitly provided under the Legislative Decree on State-Owned Enterprises No. KHK/233 and published in the Official Gazette, dated 18 June 1984, and No. 19435, state-owned enterprises are subject to private law provisions. That said, and although state-owned enterprises have corporate structures similar to those of the private companies, the High Planning Council rather than the board of directors has the authority to decide whether or not to undertake a corporate reorganisation by way of liquidation, transfer or sale.
Do any filings or other post-reorganisation steps need to be taken after the corporate reorganisation takes place?
The following post-reorganisation filings may need to be taken, depending on the outcome of the corporate reorganisation:
- notification as per article 198 of the TCC; and
- single shareholder notification as per article 338 of the TCC.
Certain notices may need to be served on the creditors or debtors before or after the corporate reorganisation, depending on the chosen mechanism.
Update and trends
Update and trends
Updates and trends
We anticipate further reorganisations will take place in the coming year as a consequence of the current economic conditions and concerns in Turkey, including the increasing difficulty in borrowing, particularly in foreign currency, liquidity concerns and the desire of international organisations operating in Turkey to refocus their activities in the region. However, we do not expect any changes in the legislation as the legislation in this area is quite robust.